IRS Revoking Exemptions of Credit Counselors

The Internal Revenue Service has revoked the tax-exempt status of more than 30 credit-counseling firms, which collectively account for more than half of the industry's revenue.

The IRS began its audits of more than 60 credit-counseling firms two years ago after consumers complained about deceptive business practices -- such as high fees, pressure tactics and inadequate educational services. About half of the industry's funding comes from banks and credit-card issuers that pay the counseling firms a percentage of money recovered through repayment plans. Currently, most banks require counselors to be tax-exempt to receive the funds.

It is unclear whether the large national credit-counseling firms that are currently advising thousands of debtors a month could be affected.

New bankruptcy laws that went into effect on Oct. 17 require consumers to go through credit counseling before being eligible to file for bankruptcy, and the IRS's audits have raised questions of whether enough court-approved counseling firms will be available to debtors. The Justice Department's U.S. Trustee Program, which oversees the nation's bankruptcy courts, is developing a list of firms that it has approved to provide the education and counseling required by the new law.Bankruptcy filings reached record highs in 2005 as consumers rushed to file before the new law, requiring some levels of repayment in most cases, took effect. According to Lundquist Consulting Inc., the week before the new laws went into effect, bankruptcy filings averaged 20,000 a day, more than triple the 2004 average.